Entertainment

15 Reasons Facebook Isn’t Worth $15 Billion

With all the hype about Facebook and talk of the company potentially being the next Google or Microsoft, I thought it was an appropriate time to provide 15 logical reasons why Facebook is not worth $15 billion.

15. Despite all the Facebook hype, MySpace is still by far the most dominant social networking website in the world. While its growth has slowed, all markets are finite and Facebook groupies should not expect that Facebook's impressive growth can continue unabated forever. It still has quite a way to go before it catches up with MySpace, and if that ever happens, it too can be expected to reach a plateau.

14. Facebook is reportedly set to generate around $200 million in revenues this year. $15 billion values the company at 75 times revenues. Google, which has monetized advertising on the Internet arguably more effectively than any other company, currently trades at around 50 times earnings (profits). Facebook's earnings are unknown.

13. The majority of Facebook's revenues reportedly come from its advertising deal with Microsoft under which it is apparently guaranteed payment regardless of how much Microsoft is able to generate from advertising sales. This type of arrangement does not realistically demonstrate how Facebook will develop a profitable, scalable long-term business model.

12. After Microsoft made its investment in Facebook, Microsoft CEO Steve Ballmer refused to predict what Facebook will be worth. This highlights the fact that Microsoft's primary interest in a Facebook investment was to secure an expanded advertising deal - not to make money if and when Facebook goes public. Essentially the equity Microsoft purchased is ancillary and Facebook leveraged the opportunity to manufacture a valuation that suited its interests.

11. Research firm eMarketer projects that by 2011, ad spending in the United States on social networks will reach only $2.5 billion. While I personally believe that most projections from research firms are BS, it's worth noting that most of the time, these projections actually exceed the numbers that are realized. For argument's sake, however, even a $2.5 billion market for social network advertising in 2011 makes it difficult to support exorbitant valuations for social networking properties. To put things in perspective, consider that Google reported revenues of over $4.2 billion in the third quarter of 2007 alone.

10. While Facebook does hold one of the dominant positions in the social networking market, the barriers to entry in this space are quite low as evidenced by the large number of social networking services out there. As Steve Ballmer even stated, "There can’t be any more deep technology in Facebook than what dozens of people could write in a couple of years." That's not to say that it will be easy for an upstart to displace a company like Facebook as the technology isn't where the primary value lies, but in relative terms, Facebook is far from being a "wide moat" company.

9. The longevity of social networking as a standalone market is questionable. Many have argued that social networks like Facebook are simply the Bubble 2.0 versions of Geocities. When the next big thing comes along and as social networking functionality is more deeply integrated within existing applications and media properties, it would be foolish to expect that Internet users' fascination with standalone social networks will remain as strong.

8. In many, if not most, consumer markets today, loyalty is very difficult to build. While users of social networks do invest in building their identities and networks on services like Facebook, the changing costs are not significant enough to guarantee loyalty. This is exemplified by the migration of users from Friendster to MySpace and now by the migration of some MySpace users to Facebook.

7. Although Facebook has seen strong international growth, it has failed to develop localized versions of its service while competitors like MySpace have been much more aggressive in doing so. Additionally, Facebook's failure to expand internationally early on created opportunity for Facebook clones like StudiVZ in Germany and Xiaonei in China, both of which gained traction and were acquired.

6. Facebook faces several legal threats. The most notable is from former Harvard classmates of Mark Zuckerberg who allege that the Facebook CEO was hired to build a similar product but stole the idea and intellectual property instead. A former Facebook "co-founder" who was sued by Facebook also apparently has a counter-suit against the company and its other founders. The strength of these lawsuits is questionable, although the recent 02138 article does note inconsistencies in the stories given by Facebook and Mark Zuckerberg over the years. Legal disputes of this nature are always dangerous because courts are unpredictable. Until these are resolved, clouds will hang over the company.

5. With the investment from Hong Kong billionaire Li Ka-shing, Facebook has a war chest of over $300 million. How it is going to be put to good use is unclear. I would argue that Facebook's decision to leverage its position to raise such a massive amount of capital on highly-favorable terms may not be of benefit to the company at this stage. It has yet to demonstrate a profitable and scalable long-term business model and its ability to successfully expand outside of its core area of business seems highly-questionable. Facebook may not be dumb for taking cheap money while it's on the table, but too much money can have a negative impact on a company in many ways.

4. Facebook's recently-launched Project Beacon imitative has caused a backlash amongst Facebook users, privacy protection advocates, the media and even government agencies. It’s clear that Facebook and Mark Zuckerberg overestimated the value they perceived Project Bacon would provide to Facebook users and underestimated the “creep” factor. The poor implementation and execution of Project Beacon does not inspire confidence in Facebook’s desire and willingness to respect the privacy of its users.

3. Despite marketers' fascination with the potential offered by social networks, Facebook can hardly be considered to have a solid relationship with marketers. In the past, advertisers have reported dismal results from Facebook advertising campaigns and even the launch of Social Ads has not cemented Facebook's place in the heart of marketers. A number of the brands Facebook so proudly announced as being "landmark" partners in November, including Coca-Cola, have put their participation on hold. Recent reports indicate that Facebook may have even lied to advertisers about how Project Beacon would work. As I have noted, the true value social networks will provide to marketers is questionable.

2. Facebook is led by 23-year old Mark Zuckerberg. He maintains significant control over a company with more than 350 employees. As one might expect given his age, Zuckerberg has no previous comparable business experience. While I don't believe age and experience are necessarily the most important elements of a capable executive, there are reasons to question his capabilities. Beyond the fact he used to hand out business cards that read "I’m CEO...bitch" and that some have described him as arrogant, over-ideological and downright unethical, he has been at the helm of some major blunders. Facebook's poorly-executed launch of News Feeds upset a large number of Facebook users and forced a stubborn Zuckerberg to backtrack. Facebook's bungled launch of Project Beacon has caused an even bigger firestorm and backtrack. More importantly, as noted above, it caused a major setback in Facebook's relationships with important brand marketers. Facebook is well beyond the dorm room startup phase and the stakes are far too high for these types of mistakes. Perhaps unfortunately for Facebook investors, Zuckerberg seems unlikely to give up control anytime soon and the favorable terms with which Facebook has raised capital leave investors with little option but to go along for the ride.

1. At the end of the day, for all of the exuberance, one of the most popular features of Facebook is still the ability to "poke" other users.

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